By Patrick Kennedy

In a sweeping one-time test of corporate tax policy, UCLA economist Patrick Kennedy (with collaborators at the Joint Committee on Taxation) analyzes the effects of the 2017 Tax Cuts and Jobs Act (TCJA), the largest federal corporate income tax cut in U.S. history. Leveraging a natural experiment due to idiosyncrasies in U.S. tax law, the study compares outcomes of corporations that received larger versus smaller tax cuts, providing clean before‑and‑after comparisons across otherwise similar firms.

Sharper incentives, faster growth

The researchers identify a substantial tax cut of 5–6% for C‑corporations relative to S‑corporations, fueled by the TCJA’s reduction in corporate tax liability. This translated into a 4.4 percentage‑point uptick in their capital stock, pointing to meaningful firm expansion. Pre‑tax profits rose by about 2.2 percentage points, signaling that the value of the additional goods and services provided by these firms exceeded the costs required to produce them.

Shareholder payouts soar

Shareholders reaped especially large benefits. After‑tax profits of C‑corps rose by 9.2%, while payouts to shareholders through dividends and buybacks jumped by 18.2%. These results confirm that much of the immediate tax windfall was distributed directly to firms’ shareholders, rather than plowed back into new equity issuance or borrowing.

More jobs and higher pay at the top

Workers also shared in the gains, but unevenly. Employment at C-corps increased by 1.3%, reallocating workers from other jobs into the corporate sector. Average earnings at C‑corps increased modestly, by 0.6%. The median worker saw no detectable change in earnings, but pay at the 95th percentile rose 1.1%, and executive compensation climbed 2.3%. These results suggest that corporate tax cuts disproportionately boosted high-income earners within firms, with little short-run effect on typical workers’ wages.

Bringing it all together: Growth and Fairness

Aggregating across the economy, the study estimates that 73% of the total income gains from the tax cuts accrued to the top 10% of households. Moreover, income gains were nearly twice as large in high-income urban centers like New York and San Francisco than in the median American county. The evidence thus highlights a central trade-off: corporate tax cuts reduce distortions, increase firm activity, and raise economic growth across the American economy, but also deliver disproportionately large benefits to high earners. For policymakers, the findings underscore that while tax cuts can spur measurable economic growth, their consequences are uneven for American households across the country.

The study, “Corporate Tax Cuts, Firm Growth, and Workers’ Earnings,” is available here.